American Express: A Fintech Powerhouse With Growth Momentum, Buy (NYSE:AXP)

RealPeopleGroup/E+ via Getty Images Investment Thesis American Express (NYSE:AXP) is a financial services company that’s been experiencing strong growth. Their revenue grew 11% YoY in Q1 2024 with EPS soaring 39%. The company itself projects full year revenue growth of 9% to 11% and EPS growth of 13% to 17%. This positive performance is backed by strong credit quality with delinquency rates remaining low. Seeking Alpha I originally started this article to analyze if AXP was a good candidate for my “value with potential portfolio” and I found that an attractive feature of AXP is its reasonable valuation compared to its growth prospects. This stands out to me in a market where valuations are getting higher. Another positive feature is its dividend income, which, although I consider it low in the industry, was increased by 17% and the company has positive ratings for growth, consistency, and Safety on Seeking Alpha. AXP low payout ratio suggests there’s room for even more dividend growth in the future. Seeking Alpha While American Express appears to be a good long-term investment, there are some risks to consider. Their business model is sensitive to economic downturns that could impact consumer spending. I also consider AXP to be part of the Global Fintech industry, which despite the slowdown in 2023, is expected to grow from the current $245 Billion industry today to $1.5 Trillion by 2030 and take a 7% share of the financial industry from the current 2% according to Boston Consulting Group. In this article, I aim to find if AXP is a solid candidate for my value with potential portfolio. To accomplish this, I will explore various factors like Management effectiveness, corporate strategy, and valuation to determine if AXP aligns with this investment style. As you will find out at the end, I have decided to start my coverage of AXP with a Buy rating given its potential for growth, market position and macro factors that impact style rotation. Management Evaluation American Express is thriving under CEO Stephen Squeri’s leadership. His 38-year tenure and high approval rating indicate a deep understanding and commitment to the company’s success. While his total compensation, including stock awards, is high, it reflects his long-term career with the company. I believe this has “high alignment ratio” with the company’s success. Salary.com During the last earnings call, Squeri discussed American Express impressive growth, exceeding expectations in Q1 2024. They’re confident in their full-year guidance thanks to strong spending, a focus on premium cards, and attracting younger demographics. He insisted that customer satisfaction is a priority, achieved through frequent updates to their value proposition. Their strategy resonates with younger generations, and they’re gaining market share despite a slowdown in small business spending. International markets are a significant growth engine, and they view competition from fintechs as a potential learning and partnership opportunity. Glassdoor American Express also thrives under Christopher Le Caillec’s, the company’s CFO, 25-year leadership. His experience and team-building skills fuel the company financial success. Q1 results surpassed expectations with 11% revenue growth. They maintain industry-leading profitability and prioritize customer engagement through premium card offerings and rewards programs. Le Caillec took the CFO role at the end of last year and is expected that he builds on the successful steps of the prior CFO, Jeffrey C. Campbell, who retired. American Express has an industry leading ROA ratio of 3.34% vs 1.07% and ROE of 32.85% vs 10.61%. He is also expected to keep growing dividend payments, last quarter the dividend increase was 17% with a 20% payout ratio. Seeking Alpha Overall, I find that American Express leadership delivered a positive message on the last earnings call. Specifically, Squeri seems to be managing the current high interest rate environment successfully with revenue and assets growth. Financially, I am expecting Le Caillec to build on the long-term career at the company and continue the success of his predecessor. Given all these factors, I am rating AXP management a “Meets expectations”. Corporate Strategy American Express prioritizes growth in premium cards, attracting younger demographics like Millennials and Gen Z through partnerships and benefits. They achieve this through frequent value proposition updates and a focus on customer satisfaction. International markets are another key area of expansion. I find that despite maintaining a lower net income margin compared to some competitors, their high-quality customer base allows them to excel in profitability metrics like ROA and ROE. It seems to me that they are committed to returning capital to shareholders by growing their dividend for two years in a row but also maintaining a strong balance sheet, keeping a low dividend payout ratio. Here is a table I created with key differentiators between AXP and some companies in the industry offering similar services: American Express Capital One (COF) Discover (DFS) Synchrony Financial (SYF) Corporate Strategy Premium cards, international expansion, attracting younger generations, customer engagements, Fintech characteristic, exploring blockchain and crypto product Focus on underserved and credit challenged segments. Innovation in Digital banking and mobile apps. Attracting younger generation through tech savvy approach. Rewards program Target customers with limited credit history. Offer rewards programs and cash back incentives. Focus on building customer loyalty. Invest in digital marketing and customer service Partner with retailers to offer co-branded credit cards. Focus on specific retail segments. Leverage partner networks for customer acquisition. Offer targeted rewards programs. Advantages Leader advantage in premium cards and benefits. Strong global brand and solid prime customer base. Solid balance sheet. Innovation focus. Strong digital presence. Expertise in attracting non-primer customers. Competitive interest rates on savings accounts attracting deposits. Strong brand recognition in rewards programs in the US. Expertise in catering to non-prime customers. Competitive interest rates on some products Expertise in cobranded cards and retail partnerships. Strong customer acquisition through partner networks. Competitive interest rates on some cobranded cards. Disadvantages Higher fees associated with premium cards. Lower profitability compared to AXP. Higher credit risk due to focus on non-primer customers Lower profitability compared to AXP. Higher credit risk due to focus on non-primer customers Limited control over brand messaging relying on partners for growth Click to enlarge Source: From companies’ website, presentations, Seeking Alpha Valuation AXP currently trades at around $231.55. The stock is up around 6% since its last reported earnings in mid-April and hovering around its all-time high of $244.41 achieved just recently. The stock, however, is up around 24.38% YTD. Now, to assess its value, I employed an 11% discount rate, this rate reflects the minimum return an investor expects to receive for their investments. Here, I am using a 5% risk free rate, combined with the additional market risk premium for holding stocks versus risk free investments, I’m using 6% for this risk premium. While this could be further refined, lower or higher, I’m using it as a starting point only to get a gauge using unbiased market expectations. Then, using a simple 10-year two staged DCF model, I reversed the formula to solve for the high-growth rate, that is the growth in the first stage. To achieve this, I assumed a terminal growth rate of 4% in the second stage. Predicting growth beyond a 10-year horizon is challenging, but in my experience, a 4% rate reflects a more sustainable long-term trajectory for mature companies that should be close to historical GDP growth. Again, these assumptions can be higher or lower, but from my experience I will use a 4% rate as a base case scenario due to the nature of their business. The formula used is: $231.55 = (sum^10 EPS (1 + “X”) / 1+r)) + TV (sum^10 EPS (1+g) / (1+r)) Solving for x = 10% This suggests that the market currently prices AXP EPS to grow at 10%. According to Seeking Alpha, analyst consensus EPS over the next 3-5 years CAGR at 15.11%. Therefore, it seems that AXP is undervalued on a fundamental basis. Further, I’ll also look at their price earnings to growth (PEG) ratio sits at 1.17x -versus a sector median of 1.13x- implying the stock price is in line with the industry. Also, their price to sales (P/B) ratio seems overvalued but when compared to a select group of companies, highlighted below, that are considered leaders in the industry, this overvaluation makes sense to me as AXP has lower risk and higher ROA. Seeking Alpha Technical Analysis AXP has been on a positive momentum this year. However, on a technical basis, the stock looks appropriately valued, its 1-year average RSI it’s in neutral territory at 50 and slightly above its 14-day moving average of 42 indicating the stock price might be changing trends. TradingView AXP has formed a strong support level at just shy of $244 and a resistance level at just under $220, the stock should move around this band awaiting more news and breach its all-time high. Next earnings report is estimated to be on July 19. Takeaway American Express is a leader in the premium credit card business with a growing bank catering to small and medium size businesses. They boast impressive growth and project strong future financials, attracting newer generations like GenZers and expanding in international markets. I also find that they have Fintech-like characteristics, investing in innovation and new product developments. While economic downturns and fintech disruption are potential risks, AXP’s financial strength as highlighted by the recent dividend increase and low payout ratio, solidify their position as a leader. I will start my coverage of AXP with a buy. Please let me know your thoughts below.

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